Patrick Industries (PATK) manufactures components and distributes building materials for the recreational vehicle (RV), marine, housing, and industrial markets, notes Doug Gerlach, growth stock expert and editor of Investor Advisory Service.
The company’s largest exposure is to the RV market, which accounts for approximately 60% of sales. Patrick sells to manufacturers of RVs everything from appliances, to HVAC systems, to fuel tanks.
Its second largest market, marine, is approximately 15% of sales, and has grown rapidly in recent years, helped by acquisitions.
The company’s products are targeted primarily at the recreational powerboat market. The RV and marine businesses address what Patrick labels its “leisure lifestyle” markets, which are benefitting from positive secular trends.
During the pandemic, its leisure lifestyle markets have held up reasonably well as individuals have sought out safe outdoor recreational activities.
Shipments of wholesale RV units are expected to be up mid-single digits in 2020 with even stronger retail demand. This has led to lean RV dealer inventories that are anticipated to serve as a tailwind in coming years. Patrick expects double-digit growth in RV wholesale shipments in 2021.
On the marine side, retail shipments are expected to be up low-double digits in 2020. Lean marine dealer inventories are also expected to lead to channel replenishment over the coming year.
Also supporting marine growth in coming years is the elevated average age of boats currently in service, which is expected to lead to an increase in boat retirements and replacements.
The remaining 25% of sales come from the housing and industrial end markets. Manufactured housing accounts for approximately 15% of sales, where Patrick offers products ranging from countertops to siding, drywall, and plumbing products.
The industrial market makes up the remainder of sales and is split between residential housing and commercial and institutional fixtures. Constrained housing supply at affordable price points and low mortgage rates provide a favorable backdrop for these end markets as well.
Patrick has driven topline growth via a combination of organic growth and strategic acquisitions. Over the last five years, sales on average have advanced at a 20% pace annually, as acquisitions and increasing market share have allowed Patrick to outpace the growth in its respective markets.
Patrick has historically directed its free cash flow to acquisitions, spending on average approximately $200 million per year in the past five years. Patrick requires acquisitions to be EPS accretive by the first full year after ownership.
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These acquisitions are intended to diversify its end markets as well as to expand geographic reach, customer relationships, and product offerings. Since 2015 its RV content per unit has grown from $1,789 to $3,086. Even more impressive content gains over this timeframe have been seen in both marine and manufactured housing.
Despite the pandemic, the company spent $125 million total on nine acquisitions through the first three quarters of 2020. More M&A can be expected in the near-term as well, as management cited a “very strong” acquisition pipeline on its recent earnings call.
Given the cyclical nature of its business, Patrick has been mindful in managing its debt levels. Net leverage today does not appear excessive at 2.2x EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The company targets a leverage ratio between 2.00-2.25x.
We anticipate the company will grow earnings 15% annually over the next five years. This implies EPS of $7.74. Applying a high P/E of 17.8, we get a potential high price of $138, an annualized 15.4% return from the current price of $68.35.
